Car finance – Everything you need to know!
You can use various methods when purchasing a new or used vehicle. While some people prefer to pay the total upfront, others opt for financing. This is because cars can be a significant expense, and spreading the cost over several months or years can be a more manageable approach for many individuals.
If you decide to finance your car, different financing options are available. The four most common types are Personal Contract Purchase (PCP), Hire Purchase (HP), car leasing and car loans. Each option has advantages, and finding an option that aligns with your requirements, financial constraints, and car finance eligibility is crucial.
In our guide we will cover all aspects of car finance, how it works, different types of car finance, the pros and cons of each finance type, how to utilise a finance broker, and any question you need answered with an extensive FAQ section.
How does car finance work in the UK?
When you apply for car finance, the lending company will evaluate your eligibility for car finance through a comprehensive process. They will review various aspects of your financial history. This includes verifying your identity, address, and job history. They will also need to see evidence of your income, evaluate your credit score, and review your financial stability.
Additionally, they will conduct a thorough background check to assess your overall financial responsibility and identify any potential red flags that could affect your ability to repay the loan. This meticulous review is crucial to ensuring that the lending company can make an informed decision about your car finance application.
If you encounter difficulties in securing finance, using a guarantor could be a feasible solution. A guarantor is someone who commits to covering the loan repayments if you cannot do so.
Whether you are looking for car finance with defaults, car finance on benefits, or no guarantor car finance, our article will explore many options to still be eligible for car finance under these circumstances.
Personal Contract Purchase (PCP)
Personal Contract Purchase or PCP car finance requires an initial deposit and regular monthly payments for a predetermined period. In some cases, you can no deposit car finance. Most finance companies can work with lenders to get their customers a £0 deposit finance deal. However, this may raise the monthly costs of the car. The period can range from two to four years, depending on the agreement. You can either pay off the vehicle or return it to the dealership at the end of the term.
The monthly payments for a PCP are typically lower than those of other car financing options, such as Hire Purchase (HP), because you are not paying for the entire car value. Instead, you only pay for the car’s depreciation value over the agreed period.
If you choose to make the final balloon payment, the car will be yours to keep. Alternatively, you can return it to the dealership or trade it for a new vehicle. It is important to note that if you decide to return the car, you may be charged extra fees for any damages or excessive mileage.
Some of the advantages of PCP car finance are:
Lower monthly payments
Monthly payments on a vehicle financed through a PCP agreement are often cheaper than those on a Hire Purchase agreement.
Positive equity
Owning a car with positive equity means the car’s value exceeds the amount left to pay. The car is worth more than the outstanding balance. This common occurrence can work in your favour, as you will get to keep the difference.
Change your car
As PCP offers lower monthly payments compared to HP, it is more likely that you will not end up owning it as the balloon payment is far higher. You can change your car within 3-4 years of your agreement by getting a settlement figure from the finance company.
Option to purchase
Once your car loan term comes to an end, you have the option to purchase the vehicle if you choose to keep it. The price you pay will be determined by the car’s guaranteed future value. This allows you to continue enjoying the car you have been making payments on and make it your permanent possession.
Some of the disadvantages of PCP car finance are:
Ownership costs
The final balloon payment is usually higher than with HP, which you would need to pay to own the car outright.
Condition of the vehicle
You must meet the standards outlined in your contract and will be charged for anything beyond fair wear and tear. So, keeping it in good condition is crucial to avoid these charges.
Mileage limits
If you keep the car the entire length of your contract term and exceed the agreed mileage limit, you could be charged extra per mile you do go over.
Possible higher interest
You will be charged a higher interest rate if you have a low credit score.
Hire Purchase (HP)
Hire Purchase: HP car finance is a method of financing where you make a deposit, usually 10% of the car’s value, and then pay fixed monthly amounts for a set duration, typically two to five years.
Upon completion of payments, ownership of the car will be transferred to you. Unlike other financing options, you do not have to worry about the agreed mileage limit with HP since you will own the vehicle outright when the agreement ends.
Some of the advantages of HP car finance are:
Fixed payment agreement
HP offers a fixed interest rate and a consistent monthly payment, unlike other finance options that may fluctuate based on interest rates.
No mileage restrictions
You will not be subject to any mileage restrictions as you will become the owner at the end of the agreement, unlike with a PCP agreement. This can be a significant advantage if you use the vehicle for long commutes, road trips, or other high-mileage activities.
Ownership
You will own the car at the end of the agreement.
Some of the disadvantages of HP car finance are:
Higher overall cost
The cost for HP car finance is more expensive than PCP as with PCP, you are not paying towards the total cost of the car. Whereas with HP car finance, you are.
Ownership
You are only considered the full owner once the agreement is completed, and all payments have been made.
Credit score
The interest rates you are offered heavily depend on your credit score. Individuals with low credit scores can anticipate being subject to significantly higher interest rates than those with good credit scores. This holds true across various financial products, with HP car finance being especially impacted.
Personal Car Loan
A personal car loan is a financing option in the UK specifically designed for individuals wanting to purchase a vehicle. It allows borrowers to spread the cost of buying a car over a set period, typically one to five years. Some lenders might provide extended terms based on the borrower’s situation.
When a borrower takes out a personal car loan, they borrow a specific amount of money from a lender to buy a car. The borrower will make fixed monthly payments to repay the loan within the agreed-upon term. The total consists of the original loan amount and the interest imposed by the lender.
Some of the advantages of a Personal Car Loan:
Fixed interest rates
Fixed interest rates on personal loans offer predictable and stable monthly payments, making budgeting easier.
Ownership from the start
A personal loan allows you to buy the car immediately, unlike leasing agreements, where you rent it for a fixed period. By owning the car, you have complete control over customisation and modifications and can sell it whenever you want.
No mileage restrictions
Unlike leasing agreements, personal loans do not have mileage restrictions, so you can drive the car as much as you want without worrying about excess mileage fees.
Some of the disadvantages of a Personal Car Loan are:
Risk of negative equity
If the value of your car goes down faster than the rate at which you are paying off your loan, you may find yourself owing more money on the loan than the car is worth. Selling or trading in the vehicle can become challenging due to negative equity, which may result in incur extra expenses.
Early repayment penalties
Certain personal loans may come with prepayment penalties, which can restrict your financial flexibility and nullify any potential savings that could be gained from repaying the loan early.
Credit score
Your overall interest rate for a personal loan is dependent on your credit score. Obtaining a good / excellent credit score could result in being offered a low APR rate loan.
Car Leasing
Car leasing offers the convenience of driving a brand new car for a fixed term, typically 2-4 years, much like renting an apartment. You have the freedom to choose the car you want, from the make and model to the fancy extras. There’s usually an initial payment upfront, like a deposit on your rent, that can range from a single month’s payment to a whole year’s worth.
Throughout the lease term, you’ll make fixed monthly payments that cover the depreciation, which is the fancy way of saying how much value the car loses over time. These payments tend to be lower than what you’d pay with a PCP (Personal Contract Purchase) or a car loan, offering you financial security.
However, unlike PCP, leasing doesn’t give you the option to own the car at the end. It’s more like a long-term rental agreement. There are often mileage restrictions, meaning you can only drive a set number of miles per year. If you go over that limit, you’ll be charged extra fees.
When the lease is up, you return the car to the leasing company, just like handing back your keys at the end of your tenancy. They’ll expect the car’s condition to be good, with the usual wear and tear from everyday driving being perfectly acceptable.
Here’s where PCP differs. PCP is like a rent-to-own option for cars. You spread the cost over a set period with a deposit upfront and fixed monthly payments. But in the end, you have a choice. You can make a final balloon payment, a more significant sum, to become the car’s owner. Alternatively, you can return the car, similar to leasing, although there might be mileage restrictions to consider. PCP can also allow you to use the equity in the car as a deposit towards a new PCP deal on another brand-new car.
What checks are done for Car Finance UK?
Upon submitting your car finance application, the company will evaluate your eligibility and financial standing to confirm your ability to purchase a vehicle and fulfil payment responsibilities.
Checks that will typically be done:
- Proof of identity
- Address
- Proof of income
- Employment
- Driver’s licence
- Credit score
- Background check
Details:
Proof of identity
Car financing companies must check your identity to prevent fraud. They confirm your name, previous names, birthdate, marital status, and address.
Address
Car finance lenders typically require that individuals have resided in the UK for at least three years before being eligible for car finance options. Lenders place significant importance on traceability, as it is an essential aspect of car finance to locate borrowers who may have stopped repaying their debt.
Proof of income
Lenders often require evidence of your income when you request a loan in order to verify that you have a dependable source of income to meet your monthly loan obligations. This process of verification typically entails submitting recent pay slips, tax returns, or bank statements as proof of your income and financial stability.
Employment
Lenders often require information about your employment or work history to evaluate your creditworthiness and determine your loan repayment ability. This information is critical because it allows them to confirm your employment status and assess your income. To verify your information, lenders may check with your employer to confirm your job title, employment status, and income.
Driver's licence
Your driving license not only acts as evidence of your identity but also confirms to the lender that you have the legal right to drive. Typically, lenders, car dealerships, and finance brokers will request a copy of your licence when you submit your application.
Credit score
Maintaining a good credit score is significant when applying for a loan. A higher credit score increases the chances of getting approved for a loan and can lead to more favourable loan terms, such as lower interest rates or a higher loan amount. Even with bad or fair credit, it is still possible to be eligible for car finance. Exploring options such as guarantor car finance can increase your chances of approval.
Background check
A comprehensive assessment of your financial responsibility and identification of any warning signs may be conducted through a background check. Through this process, lenders can gauge the risk level of extending a loan to you.
Understanding your credit score for car finance
As there are some differences from lender to lender and country to country, it is important to understand as a whole what a credit score is and how it works when applying for finance.
Firstly, what is a credit score? It is an assessment of an individual’s creditworthiness, employed by creditors to evaluate the potential risk associated with providing a loan to that Individual.
In the UK it ranked from 0-999. Different finance lenders rank the scoring differently, but majority assess the same details from employment, income, address and credit score.
Credit scoring agencies usually group credit scores into bands or categories to assist lenders in understanding the score. Although the exact ranges may differ among agencies, higher scores typically signal lower risk, whereas lower scores indicate higher risk. Fair credit car finance and bad credit car finance is still possible when working with brokers to understand your finances.
Things to consider about car finance
Is it beneficial to use a finance broker?
Finance brokers can be beneficial when you are looking for financing options. They have a vast network of lenders, including banks, credit unions, and specialist finance providers. Finance brokers can compare loan offers from various sources and find financing options that are most suitable for you.
Moreover, finance brokers can access exclusive loan deals or low APR car finance rates from specific lenders not available to the public. They work closely with you to understand your financial goals and tailor financing solutions to meet your needs. Several factors, including your income, credit history, loan amount, and repayment preferences, are considered. They also may be able to offer instant decision car finance.
Can a finance broker help you get lower APR rates?
A finance broker can assist you in securing lower APR rates on loans or financial products. Experienced finance brokers possess strong negotiation skills and can represent you effectively to obtain more favourable terms from lenders. They use their connections with lenders and their expertise to get you low rate car finance.
Is it possible to get approved for car finance if you have a bad credit score?
It is often feasible to obtain car finance even with a bad credit score. Nevertheless, individuals in this situation are typically subjected to significantly higher interest rates and limited choices than those with good or excellent credit scores.
Can someone with defaults on their credit score get approved for car finance?
Getting car finance with defaults on your credit score is still possible, but it may be more challenging and have certain limitations compared to those with a clear credit history. The borrower’s defaults on past credit agreements may lead to lenders questioning their capacity to repay new loans.
Can you get car finance on benefits?
Obtaining car finance while receiving benefits is a possibility; however, eligibility will vary depending on the lender’s criteria and your situation. Specific lenders may consider applicants who receive benefits. Still, they will evaluate your capacity to make monthly payments by considering your overall income and expenses, which includes any benefits you are currently receiving. Using a finance broker could provide you with options that include no guarantor car finance.
How long does it take to get approved for Car Finance?
Lenders may have different response times. Typically, finance partners will reply to your application within 1-2 business days. However, some lenders can provide instant decision car finance. If your case is more complex, the lender may take longer to review and decide.
Can you apply for car finance with a provisional licence?
It is possible to obtain car financing even if you only have a provisional licence and not a full driving licence. Securing car finance can be challenging, but it is possible. While it may seem premature to apply for provisional licence car finance before being legally able to drive, there are numerous valid reasons to do so. Many lenders are willing to approve your application for car finance even with a provisional licence.
What can happen if you miss a payment for car finance?
If you fail to make payments on your car loan, there can be many consequences. The nature and severity of these repercussions may differ from case to case, depending on your loan agreement’s specific terms and conditions.
Below are some typical outcomes of missing a car loan payment:
If you miss a payment on your car loan, it can have multiple effects. The outcomes depend on the agreement you signed when you took out the loan.
Some of the common effects include late fees, which are charged when you miss payment deadlines. Late fees can vary, so it is important to check your agreement. Late fees can keep piling up if you miss more payments.
Ensuring timely payments is vital when it comes to determining your credit score. Missing or delaying payments can lead to a decrease in your score. A better credit score may enhance your chances of obtaining favourable financing terms.
If you fail to make payments on your car finance on time, the lender may take steps to collect the outstanding amount. This may include contacting you to discuss payment arrangements. In more severe situations, the lender may seize the vehicle to recover the debt.
Contacting your lender is essential if you foresee any payment challenges. Some lenders may help you make a short-term payment plan or find other ways to prevent missing loan payments.
They can work with you to develop a solution that fits your needs. This could include adjusting your payment schedule or offering alternative payment options. By working together, you can find a way to manage your loan payments effectively.
What happens at the end of a finance term?
When your car finance term ends, you will have several options based on your agreement with your financing company.
If you have taken out a PCP deal then the first option is to purchase the car by making the final balloon payment, which represents the Guaranteed Future Value. This means you will own the car outright once the payment is made. For a HP deal or personal loan as you are committing to owning the car after all payments are made then nothing is required to be done as once you have cleared the cost then you will become the full owner.
The second option for a PCP deal is to return the car to the financing company, and they will calculate the Guaranteed Future Value to finalise the agreement. This means you will not own the car but will have completed your financing obligation.
Lastly, you can choose to trade in the car for a new one. This option allows you to upgrade your vehicle and make payments under a new financing agreement.
It is essential to carefully examine your financing agreement or lease contract to understand the exact terms and options available to you upon the conclusion of the term. If you need clarification, speaking with your lender or leasing company is always a good idea. They can help you understand your options and make informed decisions about your vehicle.
What should you do if you owe more money on your car loan than your car is worth?
Owing more money on your car loan than your car is worth is also known as negative equity.
There are several reasons why negative equity can happen, one being depreciation. Cars lose value as time passes, with specific models depreciating faster than others.
In the initial stages of the loan, borrowers may realise that the amount they owe on their car loan exceeds the actual worth of the vehicle, especially if they have a high interest rate or have opted for a longer loan duration.
Individuals with negative equity on a car loan must thoroughly assess their alternatives, considering their financial circumstances and current loan conditions. Consulting with financial experts or lenders can also help identify the most appropriate resolution.
Our top most asked questions on car finance | FAQs
Q. Can you pay off your car finance early?
A. Yes. However, if you do so early in your agreement, there could be a repayment fee.
If you end a finance agreement before its scheduled termination through voluntary termination rules, it will be recorded on your credit report.
Future finance companies that review your record will not have access to the reasons for the termination, which is unlikely to affect your credit score significantly. However, if you use this approach multiple times, lenders may view you as a potentially higher risk, leading to increased borrowing costs in the future.
Q. Can I hand back my car to the finance company?
A. Returning your car to the finance company is possible, but it is subject to the terms of your financing agreement and the specific policies of the finance company.
Suppose you need help making payments or no longer wish to keep the car. In that case, you may have the option to negotiate with the finance company for a voluntary surrender of the vehicle.
This is commonly referred to as voluntary repossession. However, it is essential to note that voluntarily surrendering your car does not automatically absolve you of your financial responsibilities. The finance company may still require you to settle any remaining balance on the loan after they sell the car at an auction and any fees related to the repossession.
Q. Can you modify your car while it is financed?
A. As a finance agreement does not make you the legal owner of the car, making significant modifications to it is prohibited.
This is because it can decrease the value of the vehicle and can breach the contract. The finance company needs help calculating the car’s value with the modifications, making it difficult to assess fairly.
Q. Does having car finance impact your ability to obtain a mortgage?
A. Car finance can impact your ability to obtain a mortgage because it affects your overall debt-to-income ratio and creditworthiness, which are crucial factors that lenders consider when evaluating mortgage applications.
Although having car finance does not necessarily make you ineligible for a mortgage, it is crucial to consider how it affects your financial situation and ability to afford homeownership. Managing your debt responsibly, making timely payments on all obligations, and maintaining good credit can increase your chances of qualifying for a mortgage with favourable terms.
Q. Can I get car finance even if I am self-employed?
A. Even if you are self-employed, it is possible to get car finance.
You may need to provide more information than those who are employed. This information may include proof of income, credit history, and income stability. You may also need to put down a larger deposit than those employed.
